Garmin (GRMN) Beats Earnings, Revenue Estimates In Q2

Garmin Ltd. (NASDAQ:GRMN) reported better-than-expected second quarter 2016 results with revenues and earnings surpassing our estimates. Earnings of 87 cents per share surpassed the consensus mark by almost 30% and revenues of $811.6 million by 6.7%.

At the time of this writing, Garmin shares had appreciated 11.21%.

Revenues

Garmin’s second quarter revenues of $811.6 million were up 30.1% sequentially and 4.9% year over year. Revenues were helped by higher demand across marine, outdoor, fitness and aviation segments.

Revenues by Segment

Garmin’s Auto/Mobile, Fitness, Outdoor, Marine and Aviation segments generated 30%, 26%, 17%, 14% and 13% of quarterly revenues, respectively.

Seasonality results in considerable variations in Garmin’s quarterly revenues.

The Auto/Mobile segment was up 25.6% sequentially and down 17.8% on a year-over-year basis. The year-over-year decrease was due to the shrinking of the personal navigation device (PND) market and headwinds caused by additional revenue deferrals.

The Fitness segment increased a massive 49.5% sequentially and 34.2% year over year. The growth has mainly been sourced from sale of new products - vivoactive HR and vivofit 3 activity trackers, Forerunner 735XT multi-sport-capable running watch and vivosmart HR + smart activity tracker with GPS.

Aviation segment revenues were up 1.9% sequentially and 5.9% year over year. The growth has mainly been driven by increase in sales of in Original Equipment Manufacturer (OEM) products and Automatic Dependent Surveillance Broadcast (ADS-B) systems.

Outdoor revenues were up 37.5% sequentially and 20.6% year over year. Introduction of new products like Approach X40 and Oregon 700 series of handheld GPS units and contribution of recently acquired DeLorme products drove this growth.

The Marine segment increased 34.7% sequentially and 7.6% year over year. It was driven by strength in chartplotter, fish finder and entertainment product lines. The inland fishing category improved on market share contributing significantly to this growth.

Revenues by Geography

While America generated 50% (up 28% sequentially but down 4.2% year over year) of total revenue, EMEA and APAC contributed 38% (up 37.2% sequentially and 12.8% year over year) and 12% (up 18.1% sequentially and 15.2% year over year), respectively.

Operating Results

Gross margin was 57.0%, up 258 basis points (bps) sequentially and 286 bps year over year. Stronger demand drove volumes across all segments, pulling up segment gross margins. The relatively low-margin Fitness segment did particularly well, resulting in a slightly negative mix.

Operating expenses of $262.3 million were up 3.8% from $252.6 million in the year-ago quarter. Operating margin of 24.7% was up 319 bps year over year due to the higher gross margin and expense control.

GAAP net income was $161.1 million or 85 cents per share compared with $137.6 million or 72 cents per share a year ago.

On a pro-forma basis excluding foreign currency effects net of tax, Garmin reported net income of $165.6 million compared with the year-ago tally of $138.1 million.

There were no one-time adjustments in the quarter.

Balance Sheet

Inventories were down 1.9% sequentially to $508.1 million. Cash and marketable securities were approximately $2.4billion compared with $1.06 billion in the previous quarter.

The company has no long-term debt.

The company generated cash flow of $279.4 million from operating activities during the first half of 2016. Moreover, in the reported quarter, Garmin spent about $97 million on dividends and approximately $25 million on share repurchases. The company has $123 million remaining under the share repurchase program authorized through Dec 31, 2016, and expects to repurchase as conditions warrant.

Guidance

The company has updated its 2016 guidance issued in February. Management expects revenues of $2.9 billion, gross margin of around 55%, operating margin of roughly 19%; pro-forma tax rate of nearly 19.5% and pro-forma earnings of $2.50 per share. Currently, the Zacks Consensus Estimate for revenues and earnings stands at $2.83 billion and $2.28 per share, respectively.

Conclusion

Garmin reported robust second quarter results with both earnings and revenues surpassing the Zacks Consensus Estimate. The results were driven by solid performance in each and every segment

Product line expansion was top priority for Garmin. In the quarter, the company realized positive contribution from the DeLorme acquisition, the provider of the inReach series of affordable two-way satellite communication devices for consumers. DeLorme helped in adding device and recurring service revenue to the outdoor segment.

Garmin also started shipments of vivoactive HR and vivofit 3 activity trackers, Forerunner 735XT multi-sport-capable running watch and vivosmart HR + smart activity tracker with GPS.

Management focuses on continued innovation to deliver compelling products across served markets.

However, the macroeconomic challenges remain part of the operating environment.

Garmin currently has a Zacks Rank #3 (Hold).

Investors may also consider stocks like Mistras Group, Inc. (NYSE:MG) , VOXX International Corp. (NASDAQ:VOXX) and Texas Instruments Inc. (NASDAQ:TXN) , each carrying a Zacks Rank #2 (Buy).